Making sense of a judgment

THE judgment of Special Court Judge O.P. Saini on the 2G case has let all the accused off the hook. A. Raja, the then Minister of Communications, certain Department of Telecommunications (DoT) officials and the owners and executives of companies, who were charged in three separate cases, have all been acquitted. The judge not only acquitted the accused but also suggested in his judgment that, let alone criminality, he could find nothing wrong with the procedures that Raja had adopted. His world, in which the allotment of 2G licences or spectrum occurred, appears to be in a parallel universe from that in which the Comptroller and Auditor General (CAG), the Supreme Court and the Delhi High Court operated. All these high constitutional bodies examined the same set of issues and found Raja and his close associates guilty of arbitrary changing of rules that helped certain companies.

The CAG, the Supreme Court and the Delhi High Court had, of course, examined the issue of 2G licences and spectrum from different perspectives. The CAG was looking at the loss to the exchequer. The Supreme Court examined whether the allotment of licences was in accordance with the constitutional provisions of equality before law. Another issue that the Supreme Court and the CAG examined was how 85 of the 122 licences that the DoT issued were to companies that were ineligible. The Delhi High Court looked at whether A. Raja had followed a valid first come, first served procedure. The CAG and the Supreme Court found that there was indeed a loss to the exchequer. All three held that the procedures adopted by Raja and company violated existing procedures and were patently arbitrary and unfair.

For the Supreme Court and the Delhi High Court, it was a civil matter. The Special Court, however, was looking at the same set of issues from the point of view of criminal conspiracy. It is true that in a criminal matter the bar of proof is “beyond reasonable doubt”, while in a civil matter the proof is “preponderance of possibility”. So even if evidence showed that Raja’s procedure of awarding 2G licences and spectrum had led to a loss to the exchequer and was patently unfair, the same evidence could still lead to an acquittal in the criminal case. It could be argued that his guilt (and that of others) was not proven beyond reasonable doubt.

If the Special Court Judge had stopped at acquittal, one could have understood the verdict. But Saini went much further. In his judgment, he states that he does not see evidence of a loss to the exchequer! Instead, the furore in the case was only due to the “media”. To quote the judgment: “Thus, some people created a scam by artfully arranging a few selected facts and exaggerating things beyond recognition to astronomical levels.” According to Saini, even if there were wrong decisions by the DoT, Raja, the Telecommunications Minister, was not to blame; DoT officials were responsible for all the decisions.

Given this judgment, there is a need to revisit the 2G scam and what had happened during the award of licences and to understand where Saini went wrong in his understanding of the scam.

Allocation of spectrum Spectrum, which relates to radio frequencies allocated to the mobile industry and other sectors for communication over the airwaves, is a scarce natural resource, and therefore, the price set for it has a huge impact on the fortunes of companies and on the public exchequer. Without spectrum, a cellular licence has little value as no cellular operator can provide services. In India, spectrum became a part of the licence of 2G cellular operators as a certain amount of spectrum was clubbed with the licence. That is why allocation of licence is the same as allocation of a certain amount of spectrum.

The 2G scam starts from the entry fee that was set for the licence: it was set at the price discovered during the auction of the fourth operator’s licence in 2001. The price of the spectrum in 2001 was very different from its market price in 2008. In 2001, there were only four million cellular subscribers, while in 2008, it had reached 350 million, or 75 times that of 2001.

Before Raja’s first come, first served policy, it was understood that licences would be given only when there was spectrum, and the award of licences would take place on the basis of a first come, first served queue. Between 2001 and 2008, the availability of spectrum was scarce. It was only after the defence forces and other departments vacated some spectrum that it became available and the issuing of new licences assumed importance.

Using a paragraph from the Telecom Regulatory Authority of India (TRAI) recommendation on providing a level playing field, Raja argued against auctioning new licences and for sticking to 2001 prices. In his view, if the price of the spectrum/licence was low, the cost of service would also be low and therefore more affordable to consumers.

Lock-in requirement diluted If this was indeed the argument for not auctioning licences, the logical step would then have been to provide a lock-in for the new licencees, at least for a period of three years. Instead, the DoT under Raja explicitly diluted the requirement of a lock-in and allowed mergers. Worse, it made it possible for companies that had acquired the licences to sell a significant amount of their shares. The only asset these companies had was the licence. In effect, this method of giving out licences was tantamount to allowing those who had secured cheap licences at 2001 prices to conduct a private auction at 2008 prices and realise windfall profits.

After securing the licence through a rigged process, as explained later, Unitech sold its shares to Telenor: 67.25 per cent shares were transferred at a price of Rs.6,120 crore to Telenor Asia. If we subtract the Rs.1,651 crore that Unitech paid for the licences, it made a windfall profit of three times that amount, while retaining about one-third of the shares. Similarly, Swan Telecom sold 45 per cent of its shares for $900 million (or Rs.4,113 crore). Again, it received about two and a half times of what it had invested within a few months while retaining more than 50 per cent of its shares.

How did Raja ensure that his favoured parties secured the licences? It was done by manipulating the first come, first served policy that the DoT had been following since 2001.

The DoT first announced that licences would be handed out on a first come, first served basis, with the cut-off date for applications as October 1, 2007. On January 10, 2008, the DoT uploaded a new press release stating that the cut-off date would be taken as September 25, 2007, and also asked the companies to submit their demand drafts—of up to Rs.1,658 crore—between 3:30 p.m. and 4:30 p.m. on the same day. Finally, it said that first come, first served basis would be determined not on the basis of the application date but on the basis of who had submitted the demand draft first.

The Special Court Judge believes that these companies could submit these demand drafts of such high amounts within about 45 minutes only because of a “leaky” DoT. He fails to ask how such an obviously faulty process could have been adopted without the connivance of Raja. Or why such a policy, which makes no sense whatsoever, would be adopted in the first place unless it was meant to help certain parties.

The Supreme Court, in determining the questions on natural resources and the process through which they can be licensed to private players, held: “State is the legal owner of the natural resources as a trustee of the people and although it is empowered to distribute the same, the process of distribution must be guided by the constitutional principles including the doctrine of equality and larger public good.” The Supreme Court held that the process of allotting the 122 licences on a first come, first served basis did not serve the public good, and was violative of Article 14 of the Constitution of India. That is why it cancelled the licences.

The Delhi High Court looked at the case on a much narrower issue: whether the first come, first served policy was being implemented correctly. It also found no merit in the arguments of the DoT defending its January 10, 2008, press release and quashed it. However, the order was not executed as the company that had filed the case, M/s S Tel, withdrew its case, widely held to be due to pressure from the DoT.

The Special Judge arrived at a very different conclusion from the same set of events and documents submitted to the courts. He rejected the prosecution case in its entirety. The same series of events that the Supreme Court had accepted before cancelling 122 licences in 2012 was dismissed by the CBI judge. The Supreme Court had held that the policy of first come, first served was not transparent, and its subsequent change to “first to comply” was arbitrary.

The court accepted Raja’s and R.K. Chandolia’s defence that changing the cut-off dates was because of the large number of applications they had received, an argument the Supreme Court and the Delhi High Court had rejected.

The third element of the case before the Special Court was the question, By keeping spectrum pegged at 2001 prices, who benefited from the scam? It was argued by the prosecution that a) a number of ineligible companies were allowed to bid, b) the bids of these favoured companies were pushed up the queue to receive spectrum before parties who had applied earlier and were higher up in the queue and c) illegal gratification of Rs.200 crore was given to Kalaignar TV, a family-owned company of the Dravida Munnetra Kazhagam patriarch M. Karunanidhi. Raja of the DMK was in the Cabinet as the DMK was a coalition partner in the Manmohan Singh-led United Progressive Alliance government.

Refusal to lift the corporate veil The Central Bureau of Investigation (CBI) provided the name of Swan Telecom as a prime example of an ineligible company. Its net worth requirement was met by money funnelled from a number of Reliance entities—Tiger, Parrot, Zebra, and so on. In effect, Swan Telecom was a benami of Reliance Communications (the Anil Dhirubhai Ambani Group). The Special Court refused to lift the corporate veil and go beyond the formal status of Swan Telecom. Lifting the corporate veil to establish the real owners of a company is a procedure well established in law in such cases. Instead, the Special Court took a restrictive view of when the corporate veil could be lifted, did not go beyond the formal equity owners of Swan Telecom, and therefore dismissed a very large part of the prosecution’s case.

Curiously, the Special Court Judge felt that since Reliance Communications was eligible for a GSM (Global System for Mobile communication) licence and spectrum as it held a CDMA (Code Division Multiple Access) licence it would not be interested in a second GSM licence. The fact that spectrum is a precious resource and has commercial value seems to have entirely escaped the judge, even though there was evidence before him of Swan Telecom having sold 45 per cent of its equity for a much higher value than what it paid for its licence. In other words, in a few months, Reliance, assuming Swan Telecom was its benami company, had received two and a half times what it had invested. If Reliance Communications was in collusion with Swan Telecom and Raja, there were strong commercial arguments for why Reliance would want a second GSM licence.

With the Special Court Judge dismissing the main case against Raja, his officers and the owners of Swan Telecom, the Enforcement Directorate’s case against Raja and others also collapsed. If there was no crime, as Saini held, there were no proceeds of crime and, therefore, no money laundering.

Most people, including this writer, are going to quote parts of the judgment, either to support or criticise it. The problem is one of how to explain such different judgments from three different courts.

A number of people have argued that the CBI case was weak or weakly prosecuted. There seems to be no merit in this line of argument. U.U. Lalit was the Public Prosecutor for a major part of the case, particularly when the evidence in the CBI case was presented. After his elevation to the Supreme Court as a judge, Anand Grover took over as the Public Prosecutor. The CBI and its prosecution were supervised by the Supreme Court throughout. Both public prosecutors have a high reputation for honesty and competence. It is not credible that two such highly competent and eminent prosecutors, under the direct supervision of the Supreme Court, botched up the case.

I believe that there are two major problems that the Special Court Judge had. One is that he saw only each element of the conspiracy and not the chain as a whole. For each link in the chain, he could work out alternative explanations. The second, and the more serious issue, is that he had no understanding of the spectrum and licence issues. He failed to appreciate the huge implications of cheap spectrum, how a few honest officers in the DoT were trying to fight the Minister and his favoured officers, and how difficult it was to wage such a bureaucratic battle. It is inexplicable why he has harsh words for all of them, while upholding Raja’s decisions.

On the face of it, the most important case of corruption in the country has now fizzled out, with the judge refusing to accept evidence of a conspiracy. In spite of all the evidence and the arguments, the Special Court Judge simply missed the woods for the trees.

The Bharatiya Janata Party-led National Democratic Alliance (NDA) government is now between the proverbial rock and hard place. The beneficiaries of the scam are now also favoured by the Narendra Modi government. Yes, Raja and the DMK were part-beneficiaries, but the bigger beneficiaries were the big corporate houses. While they were the direct beneficiaries, others benefited from the crossover licence at 2001 prices.

Will the Modi-led NDA government appeal in the High Court against the order of the Special Court? Or will it keep quiet in the interest of the beneficiaries of the cheap spectrum scam?